The CEO Who’s Reinventing J.C. Penney
Marvin Ellison has scored some early successes at the troubled department store, but there’s a lot left to fix.
Question: If you wanted to buy a pair of men’s shoes at a department store, would you look for them next to (a) Men’s Clothing, or (b) Women’s Footwear?
Most shoppers would probably answer “a.” But at J.C. Penney (JCP), the 114-year-old retailing mainstay, the answer until very recently was “b.” Women make up about 80% of Penney’s clientele, and Penney managers believed that, generally speaking, those women were likely to buy shoes for their spouses and beaus, just as they did during the Kennedy administration.
“It was a terrible idea,” says Marvin Ellison, shaking his head as he walks a reporter through a Penney store in Frisco, Texas. “It took space away from women’s shoes, and it made it very difficult for men to want to buy shoes.”
Ellison, Penney’s newly minted 51-year-old CEO, had a better idea. He ran a test to see whether men’s shoes would sell faster when showcased next to, say, men’s suits; once the data showed that they did, he instituted that change last summer across the company’s 1,000-plus stores. Since entrusting guys to buy their own brogues and boots, Penney has seen double-digit sales gains in footwear. “That reset has been one of the smartest things we’ve done,” says Ellison.
This Frisco store, not far from company headquarters in Plano, north of Dallas, serves as Penney’s retail living lab, and as he continues the tour, Ellison proudly points out similar changes. Fashion jewelry now sits closer to its Liz Claiborne apparel brand, so women can try on accessories to go with a dress they might buy. The decor has been gussied up at the store’s traffic-driving in-house salons. Handbags got a face-lift too. After Penney failed to cash in on the recent handbag boom, managers did a deep-dive market analysis. Ellison’s conclusion: “Our handbags were ugly. We had to change them.” (It sounds less harsh in Ellison’s gentle Tennessee baritone.)
Photograph by Nancy Newberry for Fortune
As the adage goes, “Retail is detail.” And if the details Ellison is addressing seem forehead-slap obvious, signs of how far J.C. Penney had fallen behind its rivals—well, welcome to his world. Ellison became CEO last August with a mandate to plug the store’s countless leaks in operations, strategy, and technology, problems left over from the chain’s nearly fatal attempt to reinvent itself four years ago. He and Penney’s board are betting that such small but meaningful improvements will add up to a full recovery.
That now-infamous overhaul, under then-CEO and former Apple (AAPL) retail guru Ron Johnson, sought to reposition Penney as a flashier retailer with fancier merchandise. But it backfired: Customers fled, sales tumbled by almost a third, and Penney was crippled financially. Three years ago the board brought back Mike Ullman, the CEO it had unceremoniously chased out in favor of Johnson, to stop the U.S.S. Penney from sinking. And last summer he handed the reins to Ellison—an executive the opposite of flashy.
It’s fitting that Ellison, a lifelong musician, plays electric bass, an instrument that rarely gets a flashy solo but without which no band can click. He made his reputation in retail at Home Depot (HD), helping engineer that chain’s turnaround by focusing on unsexy but primordial things like the supply chain and the integration of stores and e-commerce. He’s a data devotee who grounds every decision in information—including that seemingly intuitive shoe move. “Pure intuition without any data gets you in trouble,” Ellison says. Referring to the Johnson era, he adds, “We went through 18 months of that, and we’re not going to do it again.”
Photograph by Gregg Segal for Fortune
Ellison’s early results are encouraging. Penney reported a 3.9% increase in comparable sales during the 2015 holidays, one of the best performances in retail that season. (Rival Macy’s saw “comps” shrink by 5.2%.) That followed seven quarters of sales growth in the previous eight. And although Penney hasn’t reported a profit since 2010—and hasn’t predicted when it will again—it’s aiming for $1.2 billion in Ebitda (earnings before interest, taxes, depreciation, and amortization) for fiscal 2017, nearly double the level of fiscal 2015.
The trees look nice, but the forest is daunting. Penney’s sales, an estimated $12.6 billion for the just-completed year, are still down 37% from their 2006 peak. Its nascent recovery, part of its fourth turnaround effort since 2000, hasn’t swayed Wall Street—its stock trades close to a 35-year low. In the long term, the problem isn’t just that Penney has been dysfunctional; it’s also that Penney is a department store, a practitioner of a business model under siege. It faces hordes of competitors in its core apparel and home-goods businesses: department-store rivals Kohl’s (KSS) and Macy’s (M); Target (TGT) and Walmart (WMT); discounters like T.J. Maxx (TJX); and, of course, Amazon (AMZN). And consumers, especially younger ones, have lost interest in browsing at the mall. “The struggle is not going to end,” says Mark Cohen, director of retail studies at Columbia Business School. “The traffic that is off isn’t coming back.”
Ellison’s response has been to make Penney smarter and more efficient at keeping customers loyal and selling more to each one. That means embracing Penney’s mall-ness—and trusting that there’s still a place in the retail landscape for a mid-market department store. And if that means playing catch-up for a few years before making bigger, bolder moves, so be it. “We’re going to start with the foundation: No one can beat us being us,” Ellison says.
Turnarounds are nothing new at J.C. Penney. Founded in 1902 as a Wyoming dry goods store, Penney became one of the 20th century’s biggest department stores and catalogue retailers, dominating middle-American towns and suburban malls. But sales began to erode in the late 2000s. Penney was slower than rivals to emerge from the Great Recession and struggled with shrinking profit margins in its apparel business.
This was the situation Ron Johnson was hired to turn around. In 2012 he began a sweeping transformation aimed at shedding Penney’s stodgy image. He dumped its coupon program and changed everything from the logo to the checkout process. Most notably, he tried to make Penney hipper. Johnson dropped or de-emphasized several profitable in-house clothing and home-goods product lines, while trotting out cheaper versions of upscale brands like Michael Graves and Bodum.
The results have been widely chronicled (including in Fortune): The makeover bombed, sales plummeted, and some 40,000 jobs were eliminated. (Johnson declined to comment for this article.) In the spring of 2013 the board ousted Johnson and rehired Ullman, but the worst damage was done. The chain’s inventory management and e-commerce operations were in chaos, and Penney ended up with some $5 billion in long-term debt. The hindsight consensus was that Johnson had dismissed Penney’s core shoppers: middle-income suburban moms with neither the inclination nor the budget to worry about being cutting-edge.
If anybody can relate to those customers, it’s Marvin Ellison. Ellison, one of only five African-American CEOs in the Fortune 500, grew up in Brownsville, Tenn., a two-stoplight town between Memphis and Nashville that was segregated well into the 1980s. He’s one of seven children, and his family was poor. His father at one point worked three jobs at once, too proud to take government assistance. Still, the Ellison family would shop twice a year at J.C. Penney, first for back-to-school clothes and then at Christmas. The family also performed as a gospel act—and got its stage outfits there too. “Going to J.C. Penney was a big deal. It was something we looked forward to,” his older sister Virginia recalls.
Courtesy of J.C. Penney
Marvin’s father, an honors student, had to drop out of high school to support his family after Marvin’s grandfather suffered a heart attack at harvest time. The senior Ellison saw education as a way out of poverty and imparted a deep love of reading to his kids. Marvin developed big ambitions at an early age: The books he likes best are biographies of Presidents; Harry Truman is his favorite. He met his wife, Sharyn, when both were students in the 1980s at what’s now the University of Memphis. (He later earned an MBA from Emory, in 2005.) Sharyn, 47, says Marvin caught her eye as the only young man on campus toting a briefcase rather than a backpack. Date nights early on revolved around episodes of Dallas, the ultimate business soap opera.
Ellison’s retail career started during college, almost by accident. To help pay for books and rent, he took a part-time job as a security officer at Target at $4.35 an hour. That gig turned into 15 years at the retailer, as he climbed the ranks in theft prevention. Those early jobs gave Ellison a close-up view of how retail works at the store level, everything from the cadence of markdowns to the science behind keeping shelves stocked. But the jobs also taught him something that would shape his management style: Too many managers don’t listen to the troops on the frontlines, the workers in stores. Ellison had tons of ideas but didn’t share them with managers, he says, because they wouldn’t ask.
“Too many CEOs in retail like to be the smartest person in the room,” says Home Depot co-founder and former CEO and chairman Bernie Marcus. “Marvin’s not like that.” After Ellison joined Home Depot in 2002, he promptly sought advice from Marcus, who had recently retired. The two went on store visits three or four times a year to talk strategy and culture. Home Depot soon went through its own crisis, enduring lagging sales and plummeting morale under CEO Bob Nardelli. After Frank Blake replaced Nardelli in 2007, Blake became another advocate for Ellison, eventually naming him head of U.S. stores.
Blake credits his former protégé with helping fix Home Depot’s dismal customer-satisfaction ratings and turning the company from an e-commerce laggard into a leader. He also praises Ellison’s knack for galvanizing workers. In one memorable innovation, Ellison launched a weekly video feature on Home Depot’s internal TV station that showcased customer-service success stories. Blake compares them to ESPN’s SportsCenter highlights: “They provided a ‘Wow, that’s amazing’ element to work so that people could see how impactful their work could be … It makes the associates stars.”
“Everyone on the board knew Marvin would end up running a major retailer,” adds Blake. But it wasn’t to be at Home Depot. In 2014 the company chose Craig Menear to succeed Blake. Menear had been the chain’s chief merchant, which meant he had an edge Ellison lacked: extensive experience deciding which merchandise to sell and working with buyers to spot promising products. Such “merchant princes” tend to dominate the corner office in retail: Former top merchants currently run Kohl’s and Macy’s.
But that résumé gap didn’t stop Penney’s board from approaching Ellison that summer to be its future CEO. Mike Ullman, who was instrumental in the search, says that while Ellison may not know merchandising inside and out, he is self-aware enough to surround himself with people who do. “He knows who he is and exactly what he wants to accomplish,” Ullman says.
Penney announced Ellison’s hiring in October 2014, and since then Ellison has conducted more than 60 employee town halls and visited 100 stores. In a relatively uncommon hiring agreement, Ellison was designated to become CEO, but first would spend nine months as president under Ullman. The two men traveled the world, visiting vendors and partners so that Ullman could give Ellison a crash course in areas he was less familiar with, like apparel factories, sourcing, and merchandising. The Ullman-to-Ellison CEO handoff took place last August, but even today Ellison is constantly listening and watching, taking the measure of his colleagues.
Face-to-face interaction helped Ellison quickly spot disconnects between Penney’s executives and its store employees. Early on, he was irked to see senior management in stores wearing designer clothing far beyond the budget of a typical staffer or customer. A snappy dresser himself, Ellison implemented a rule requiring executives to wear J.C. Penney–made clothes when they visit stores and to wear the same name tags store workers do. (During the Frisco store tour, Ellison and the executives all wore Penney brands—Ellison and the other men in Michael Strahan and Stafford suits, a woman colleague in Worthington.)
Fashion choices weren’t the only issue on which management and staff weren’t connecting. One legacy of the reinvention fiasco was that inventory management was a mess. Senior management frequently felt that stores were sufficiently stocked, but in-store employees were constantly alerting Ellison to shortages. Management’s misreading was exposed on Black Friday weekend in 2014. Penney rang up decent sales but left money on the table, as stores were out of stock of hot items because they had ordered too few. (One hint of the magnitude of lost sales: Penney ordered 330,000 pairs of women’s boots for Thanksgiving weekend in 2014 and ran out; in 2015 it ordered 1 million pairs.)
Inventory management is a challenge tailor-made for Ellison—part organizational, part technological. His new tech team, which includes several of his former Home Depot lieutenants, has instituted “demand-based logic”: Rather than, say, automatically shipping 1,000 handbags of a given make to every store every month, Penney now replenishes inventory based on real-time sales data. (That may sound like an obvious fix, but, hey, remember the men’s shoes?) Ellison is also refining Penney’s pricing decisions by building databases to better synchronize markdowns and promotions with changes in demand.
Penney’s tech to-do list is lengthy, particularly in e-commerce. All Kohl’s and Macy’s stores offer same-day pickup for online orders, something that Penney is only getting around to this year. And with smartphones fueling 50% of digital traffic, Penney cannot afford to have what Ellison concedes is currently a subpar shopping app. Mike Amend, one of the Home Depot transplants, is hustling to overhaul it. His priorities: integrating coupons and other incentives so that the app can tell shoppers an item’s bottom-line cost. (Amend needs to hurry up—Kohl’s app already does that.) Coming later this year: handheld devices that will let store workers check customers out from anywhere in the store, not just the registers. These devices may look familiar to some shoppers: They’re identical to the ones used at Home Depot.
As Ellison sees it, Penney’s growth will come from getting a lot more sales from its existing customers. Penney says it now has 87 million active shoppers, the same as in 2011. (At its nadir in 2013, Penney had lost 20 million customers.) It posted average annual sales of about $155 a square foot in 2014—33% below their 2006 peak and well behind those of its competitors (see charts below).
To make its stores more productive, Penney can tap a host of enviable retail franchises. Take its 850 hair salons. Few people know it, but the J.C. Penney salon business is the largest such chain in the country; in some markets they’re the dominant salons in town, destinations for prom days and wedding weekends. The salons themselves generate almost 5% of sales. Even more important: Penney says salon customers are among its most reliable shoppers. As Ullman says, “You can’t get a haircut online.” The salonistas come in eight times a year—twice as often as the average department-store customer—and spend twice as much.
Many of the salons, frankly, look tired. But Penney signed a deal last year with InStyle magazine to rebrand and upgrade them, with a full rollout due to be completed this year. (InStyle, like Fortune, is owned by Time Inc.) (TIME) At the Frisco store the salon has been overhauled already, with slick signage, exposed-brick walls, and a bigger entryway designed to make it more visible and inviting. Penney hopes the rebranded salons will attract top-notch stylists who will, in turn, bring their clients—a new set of customers to woo.
Photograph by Nancy Newberry for Fortune
Ellison also plans to better coordinate the salons with Penney’s in-store Sephora cosmetics boutiques—veritable cash machines where annual sales per square foot are almost $600. Of course, many Sephora shoppers come in, buy lipstick and mascara, and walk right out. Ellison is betting that souped-up salons in proximity to Sephora will offer customers a reason to spend more time at the store and keep them off Amazon.com.
Another prong of Ellison’s strategy: expanding a strong suite of private-label clothing brands. Penney-only brands in home goods and clothing together generate 51% of company sales; its top-selling attire brands include Arizona, St. John’s Bay, and Liz Claiborne. Penney is already a player in clothes for “big and tall” men, and it now wants a similar position in plus-size women’s clothing. But it also believes its brands could lure younger shoppers. That’s an existential priority: According to consultant Kantar Retail, the average Penney shopper is nearly 49 years old—up from 46.6 in 2011, and slightly older than the average at Target and Macy’s.
Ken Mangone, who oversees private brands, says Penney recently noticed that its a.n.a clothing brand was unexpectedly popular with younger women. Penney quickly developed Belle + Sky, a similar line intentionally focused on young shoppers, which it just rolled out to 500 stores. Ellison also used Belle + Sky to accomplish another goal: faster turnaround times to compete with “fast fashion” leaders like H&M and Forever 21. Penney squeezed the concept-to-production cycle time to 25 weeks for Belle + Sky, compared with about 35 weeks on average for its apparel lines.
Photograph by Nancy Newberry for Fortune
Penney’s in-house brands have one thing in common: They’re affordable. According to Kantar, the average household income of a Penney shopper is $63,412, vs. $69,000 or so at Target and Kohl’s and $75,274 at Macy’s. Memories of watching his parents stretch their budget help Ellison relate to a lower-income customer, he says. He recalls that at one point, to make ends meet, his studious and ambitious father took an extra job as a busboy at a Ramada Inn: “If you saw the guy with a bow tie on, serving drinks, you had no idea who he was if you didn’t ask.” The blue-collar crowd isn’t the market that looks sexiest to investors, but he’s adamant that Penney’s future hinges on it. “We can convince ourselves that our core customers are a more affluent demographic, but really, they’re not,” he says.
As we tour the handbags section in the Frisco store, an annoyed customer approaches Ellison and his name-tag-wearing co-execs. There’s nobody around to ring her up, she complains, and she had the same problem at the holidays. “Why don’t the four of y’all get some cashiers,” she says. A store manager quickly steps forward to help. But when one underling tells the woman that the store has been busy, Ellison snaps, “ ‘Busy’ and ‘bad’ are the same thing to the customer.”
In a sense, being “busy” is a sign of a broader contraction. As sales have declined, department stores have closed locations and reduced headcount, compromising service and fueling more customer defections. Industry trends like those fuel skepticism about Penney’s future. Retail experts speak of Ellison with admiration, but many see built-in limits to what he can do. “Macy’s and J.C. Penney are fighting it out amongst themselves for a dwindling share of the market,” says consultant Robin Lewis, CEO of the Robin Report and a former head of Goldman Sachs’s (GS) retail practice. Kathy Gersch, founder of consultant Kotter International, notes that J.C. Penney is “fixing the major problems,” but if it can’t become relevant to younger customers, “ultimately there is a ceiling.”
The decline of the American mall makes Ellison’s job harder. According to Green Street Advisors, 635 of Penney’s 1,020 stores are in malls, and about a third of those are in so-called C- and D-malls—locations with a lot of vacancies, which in turn hurt traffic for the remaining tenants. (Penney has reduced store count by about 80 since 2012, but Ellison has resisted closing more.) Ellison’s biggest initiative so far is actually a play on the weakening mall climate. This year, for the first time since 1983, Penney is selling appliances, beginning with a 22-store pilot project. The decision is data driven: The stores realized that a lot of customers were searching for appliances on jcp.com. But it’s also a response to the fact that Sears (SHLD), another mall anchor, is shrinking fast—giving Penney a chance to grab shoppers looking for a fridge.
Observers waiting for a big, splashy move from Penney will have to keep waiting. Penney’s debt, which generates about $400 million a year in interest costs, is a handcuff that impedes any major makeovers. Its capital-spending budget is about $300 million a year, a fraction of what Target, Macy’s, and Kohl’s each spend. While Macy’s has been plotting an international expansion, and Kohl’s plays around with incorporating virtual reality and robots on the sales floor, Ellison is stuck with prosaic tasks. In February he announced that Penney was looking into selling and leasing back its Plano headquarters to whittle down some of that debt.
Pressed on whether Penney can return to its 2006 apex, when it had $20 billion in revenue, Ellison punts, saying he’s not so concerned with a top-line number as he is with creating a profitable, sustainable business. “We’re not going to sit on our hands and play the same cards we played in the past,” he says. “We’re going to be a modern retailer.” But there will be no retail-rock-star pyrotechnics. For now Ellison is playing bass, providing a steady foundation that may, someday, get Penney back in the groove.
A version of this article appears in the March 1, 2016 issue of Fortune with the headline “The Man Who’s Re-(Re-Re)Inventing J.C. Penney.”